The Global Depositary Receipts
A bank certificate is issued in multiple countries for shares in a country outside of the jurisdiction. We call this GDR or Global Depositary Receipt. A GDR lists share in numerous markets. And when we say markets, we refer mainly to US and European markets and one exchangeable security.
When can we usually encounter GDRs?
If issuing entities raise capital in the local, international, and US markets, we can most likely encounter GDRs. It can be possible with private placement or offerings of public stocks. If you are aware of ADRs or American Depositary Receipts, GDRs are pretty similar to them. They are only different because ADRs lists shares of a foreign country in the US markets.
Diving deeper into GDRs
We have mentioned that GDRs are bank certificates that stand for shares in a foreign country. For example, we have an international bank with a foreign branch that holds the shares. These shares are traded domestically. Globally, different branches of the bank offer the shares for sale. When a private market wants to raise capital denominated in EUR or USD, it can use GDRs. However, aside from GDRs, we also have EDRs. EDRs, also known as European Depositary Receipt, is used when private markets want to have EUR rather than USD.
GDRs are known to be negotiable certificates. Hence, investors trade them in various markets. They also use market capital to manage the long-term trade debt instruments and also to raise capital. According to many people’s experience, international market GDR transactions are considerably cheaper than other mechanisms when trading foreign securities.
For example, a company in the US that wants its stock to get listed in multiple exchanges can do so using a GDR. This company will agree to a depositary receipt agreement with the depositary banks involved. On the other hand, these banks will also issue shares in their stock exchanges complying with the regulations of involved countries.
The GDR and shares
A GDR will represent a company’s specific quantity of shares. It can represent just a portion of a share to multiple shares. It depends on the GDR’s design. If the GDR represents various shares, the receipt value will be more than the amount of a single share. Now, who manages and distributes these GDRs? The ones in charge are the depository banks, and they work in an international context. They are also responsible for setting the GDR’s ratio for every home country’s shares at a value that will spark the interest of investors. It should not be too high or too low.
GDR shares and trading
Before we end our topic, let us talk about the relevance of GDRs in trading. Companies that issue GDR want to get the interests of more investors. A GDR is said to be a cheaper mechanism where investors can participate. They trade as domestic shares, but investors can also buy them in an international marketplace. So, who takes care of the share while the transaction process is still ongoing? It is the custodian bank, and it ensures that all participating entities protection.
Brokers stand in place of the buyers, and they also manage the DGR’s buy and sell. These brokers are most likely from the home country while they sell within the foreign market. If you buy an asset, know that it involves many stages. If we name them, we have brokers in the investor’s home country. We also have brokers within the market and in contact with the company issuing the shares. Finally, we also have the custodian bank and the bank that represent you, the buyer.